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Perfectly Competitive Market
A market that meets the conditions of having (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market
Consumers and Firms have to accept
the market price if they want to buy and sell in a perfectly competitive market
Price taker
A buyer or seller that is unable to affect the market price
Spontaneous order
The natural emergence of order in a system from individuals actions without central control
Profit
Total revenue minus total cost
Average revenue
TR divided by Q of product sold
Marginal revenue
The change in total revenue from selling one more unit of a product
Maximum profit for a PCM is obtained at
MR = MC
Profit equals
(p - atc) x Q
P > ATC
Profit
P = ATC
break even
P < ATC
Loss
Short run, a firm taking a loss has two choices
Continue to produce
Shutdown temporarily
Sunk costs
A cost that has already been paid and cannot be recovered
In a shutdown, we are assuming
fixed costs are sunk costs
Firms should shutdown if
P < ATC
The shutdown point in a PCM
MC = AVC
MC is the supply curve when its
above AVC
Shutdown point
The minimum point on a firm’s average variable cost curve; if the price falls below this point, the firm shuts down production in the short run.
Economic profit
Revenue - all costs (implicit & explicit)
Economic loss
The situation in which a firm’s total revenue is less than its total cost, including all implicit costs
Long run competitive equilibrium
The situation in which the entry and exit of firms has resulted in the typical firm breaking even
Firms in perfectly competitive markets are in a constant struggle
to stay one step ahead of their competitors
Productive Efficiency
A situation in which a good or service is produced at the lowest possible cost
Allocative efficiency
An economy where goods and services are produced based on consumer preferences, with each item made until the benefit to consumers matches the cost of producing it.
1st characteristic of perfect competition
many buyers and sellers
2nd characteristic of perfect competition
the product is identical
3rd characteristic of perfect competition
easy to enter/exit the industry
If it has two graphs side by side, we are
most likely dealing with perfect competition
How can you have an increase in supply if firms are producing less?
More firms enter the market
On a PCM graph, MC goes through both
AVC and ATC
Perfect competition provides a standard against
which you can measure other things
